MIDDLE EAST ECONOMY WATCH - RECOVERY ACCELERATES IN GCC, DESPITE INFLATION CONCERNS - PWC
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November 2021
Middle East Economy Watch
Recovery accelerates in GCC, despite inflation concerns
Over the last few months, COVID-19 has and OPEC+ is tapering its production cuts.
retreated across the GCC, even in countries These twin factors are helping drive a solid
that have been slower on vaccinations such improvement in public finances, with the IMF
as Oman and Kuwait (although they are now forecasting that the GCC as a whole will return
catching up). This, unfortunately, isn’t the to a fiscal balance in 2023, for the first time
case across the whole Middle East—Egypt, since 2014. Even Oman, which was struggling
for example, is in the midst of a fourth wave with a large structural deficit before COVID-19
currently. However, it provides a vision of what is seen returning to surplus next year as a
life after COVID-19 can look like. result of significant reforms on top of the
rebounding oil price.
The turnaround has come just in time for the
opening of Expo in Dubai. It is too early to The optimism in the region is also driving
judge whether the event will attract close to a wave of major IPOs, particularly in Saudi
the 14m international tourist visitors that were Arabia and Abu Dhabi, with more expected
originally targeted, but even half this number soon.
would represent a dramatic improvement in a
vital sector. There are always clouds on the horizon of
course. Inflation is a major concern globally
Across the region, tourism and transport but does not appear to be too much of a worry
remain subdued, but most other non-oil in the GCC currently, although in Iraq it has
sectors are returning to their pre-COVID-19 spiked to a 9-year high.
levels, with Saudi Arabia seeing the quickest
rebound thanks to its large pool of domestic
demand and spending on giga-projects.
Alongside the non-oil recovery, oil prices are
at their highest sustained level since 2014
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GCC economies rebound as COVID-19 retreats and Oil production rises and prices surge
oil surges Underpinning the non-oil sector confidence is the strong rebound
that is now underway in the oil sector. The strict compliance of
In the last few months, COVID-19 has retreated across the GCC. In
OPEC+ members, driven by Saudi Arabia’s cajoling and leadership
early October, daily deaths had fallen to just 6 in the region of 66m
through additional voluntary cuts, succeeded in bringing global
people and daily cases below 400. These were the lowest rates since
crude inventory levels below their five-year average. At the same
the first days of the pandemic, well below the previous lull in Q1 and
time demand continues to pick up as COVID-19 recedes in many
about a fiftieth the concurrent incidence in the US, on a population-
parts of the world. As a result, OPEC+ has begun to taper its cuts,
adjusted basis. The rollout of vaccines (UAE, Bahrain and Qatar are
releasing an additional 400k barrels per day (b/d) each month
among the highest in the world), strict policies on travel and social
bringing total production to nearly 40m b/d a month. The OPEC+
interaction (now being relaxed in places) and the benefits of having
deal has been extended from April to December 2022, but GCC
compliant populations skewed towards young healthy migrants have
states should still see double-digit year-on-year (y/y) growth in
all helped.
oil production during 2022 because of the tapering as well as an
agreement to increase the baseline levels of UAE, Saudi Arabia and
COVID-19 incidence in GCC (7-day average)
Kuwait, which had lower quotas relative to their capacity than for
10,000 Cases Deaths 100 other OPEC+ members.
8,250
7,968 80
8,000 80 Alongside rising production, GCC states are benefiting from soaring
69 oil prices. Brent crude touched $84 on 11th October 2021, its
6,000 60 highest level since 2014 (bar a week-long peak in 2018) and has
more than quadrupled its low in April 2020. Global gas prices have
4,000 40 surged even further, with Asian and European spot prices touching
record levels that were more than 25-times their 2020 low and
2,000 20
2,066 equivalent to oil at over $300 per barrel.
12 6
0 390 0
This has been beneficial to liquified natural gas exporters in Qatar,
Mar- 20 Sep- 20 Mar- 21 Sep- 21
Oman and Abu Dhabi, and is also boosting oil demand as countries
Source: WHO temporarily pivot their electricity generation from gas to oil.
Recovery is evident in GDP, but some sectors still struggle
Budgets move towards first balance since 2014
Even before the dramatic improvement in COVID-19 during Q3, there
were clear signs of an economic rebound underway, as is visible by The oil market is fickle and current prices may not be sustained.
comparing quarterly GDP with 2019. Saudi Arabia’s non-oil GDP However, the fiscal breakeven oil prices have declined substantially
even exceeded its pre-pandemic level in Q1, although there was a across the region, with fiscal reforms meaning that most GCC states
temporary step back in Q2 as a result of the Delta wave restrictions. can balance their budgets at $70 per barrel or less, whereas in 2018
Bahrain and Oman were close to $100 and Saudi $90.
Non-oil real GDP (% vs same quarter in 2019)
The IMF now forecasts an aggregated GCC general government
5 fiscal deficit (including off-budget items, such as most sovereign
wealth fund income) of just -1.8% of GDP in 2021. This compares
0
-0.8 with its forecast of -5.7% a year ago and -3.0% in April 2021. It has
-5 -3.3 revised up its expectations of oil prices to Brent crude averaging
-5.4 $67 per barrel this year from $40 per barrel a year ago. The IMF’s oil
-10 -5.4
price assumptions are based on the futures market, which shows a
-15 gradual decline in the coming years to $58 in 2026. The reality could
Saudi Qatar
be quite different, with some forecasters expecting the current prices
-20 Bahrain Dubai of $80+ to persist in 2022 while others see a sharp drop as OPEC+
-19.8 Kuwait boosts output and if US sanctions on Iranian exports come to an
-25
end.
Q120 Q220 Q320 Q420 Q121 Q221
If the IMF’s oil assumptions hold, the GCC as a whole could return
Source: National statistical agencies; PwC analysis
to fiscal balance in 2023, for the first time since 2014. Qatar is
Despite the overall recovery, the most COVID-19 exposed sectors already in surplus, and Oman and Kuwait could return to surplus
are still struggling. In Q2, hospitality was still down by -44% vs 2019 in 2022, with only small deficits in the UAE and Saudi Arabia.
in Bahrain and -21% in Qatar. Transportation was down -29% in Bahrain is the one country where the IMF forecasts persistently
Qatar. By contrast, financial services have boomed across the region large deficits, including -8% of GDP in 2022, however the forecast
as central bank intervention has maintained liquidity and mitigated was made before it announced plans to double VAT and reboot its
default risk, with the sector up by 6% vs 2019 in Saudi Arabia and fiscal balance programme, aiming to achieve a central government
17% in Qatar. Other major sectors are largely back to their 2019 balance by 2024. Meanwhile, the IMF sees GDP growth averaging
levels in most states that have reported Q2 GDP. 2.4% in the GCC this year, rising to 4.1% in 2022, the most since
2015.
Leading indicators point to a strong Q3
GCC fiscal balance (% GDP, general government, by forecast date)
Leading indicators during Q3 suggest that the quarter was a strong
one, and when GDP will likely have exceeded 2019 levels. The
purchasing managers index (PMI), one of the best proxies for non- 4 Oct-21 Apr-21 Oct-20
1.2
oil private sector activity, reached a record level of 60.6 in Qatar 2 0.0
-1.8
in September and a 7-year high of 58.6 in Saudi Arabia. It wasn’t 0
quite so strong in the UAE, but the Q3 average of 53.7 was still the -2
strongest in over two years and far above the 50-point level that -3.0
-4
indicates economic expansion.
-6
There were other positive signals from business confidence surveys -8 -5.7
and tourism measures. Visitor arrivals are recovering. In Qatar -10
for example, arrivals were up by 62% month-on-month (m/m) in -12
August to about a third of the pre-COVID-19 level. Foreign credit
card transactions in Bahrain rose by 37% month-on-month (m/m)
14
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17
18
19
20
21
22
23
24
25
26
20
20
20
20
20
20
20
20
20
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20
in August and comprised 18% of total point of sales by value, Country space (x years)
double the level in Q2 and not far off the 23% average in 2019. This
suggests that tourists, mainly from Saudi Arabia, have returned. Source: IMF World Economic Outlook
Inflation concerns in the GCC Meanwhile, Qatar and Kuwait are still considering whether to
introduce VAT, but neither is likely to do so during 2022, partly
The flip side of a strong recovery and the rebound in oil is rising
because of concerns about the inflationary impact. The IMF
consumer prices. There are concerns globally about inflation, which
forecasts only modest inflation in 2022, averaging 2.4% across the
has reached the highest since the 2007 spike in both the US (5.3%)
GCC, and then a steady 2.2% in 2023-26, close to the long-term
and Eurozone (3.4%). There are a wide range of factors at play
average.
including the cascading impacts of temporary pandemic-related
supply chain constraints, from lumber to semiconductors, and Expo hopes
staffing shortages as people are unable or unwilling to return to their
previous sectors of employment. Economists and policymakers Dubai Expo opened on October 1st after a year’s delay due to
remain divided as to whether the current global inflationary pulse will COVID-19. Even before the pandemic, there had been hopes that the
ease in 2022—as the US Fed currently believes—or could become six-month-long event would provide a boost to the economy, which
more long-lasting. had been in the doldrums due to oversupply of real estate and falling
prices. The damage that COVID-19 has caused to the vital tourism
Countries in the Middle East are exposed to these global price sector has further added to the weight of expectations placed on
fluctuations because of heavy import dependence. Cuts in subsides Expo.
since 2016 also mean that most now have domestic fuel indexed
to global prices. There are also localised factors at play in each The targets announced for the event back in 2019, before the
country, such as high population growth in Egypt and long-running pandemic, were for 14m international tourist visitors and 11m
rental deflation across the GCC, which pre-dates COVID-19 but has resident visitors. However, success for the event and for Dubai does
been exacerbated by expat departures. While there have been some not require meeting this target.
short-term labour constraints in the region, contributing to wage
inflation, Gulf states should be able to adjust fairly easily through Expo tourists (million)
important new migrant workers now that COVID-19 constrains are Total tourists if %80 visit 17.5
easing.
Tourists visitors targeted 14.0
Most countries have rebounded from the COVID-19 deflationary
trend, but inflation has so far remained relatively constrained relative
Tourists Q1 & Q4 2019 9.2
to historic levels in each country. Barring Lebanon, where a currency
crisis is causing hyperinflation (138% in August), Iraq has the highest Tourists Mar - Aug 2021 2.4
inflation in the region at 7.4%, the most since 2012. However, other
countries are only seeing their highest levels in 2-5 years. Tourists Q4-20 & Q1-21 2.4
Inflation (showing recent low and years since last at current levels) Source:Dubai Tourism; PwC estimates.
Iraq (9 years) 7.4
-0.3
During the first ten days of the festival, there were 411,000 ticketed
3.0
Qatar (5 years) -3.4 day visitors. If this rate were to be sustained for the whole festival, it
2.2
would equate to 7.5m visitors. However, it is likely that momentum
Oman (4 years) -1.6
for Expo will build as the weather cools, word spreads about the
Kuwait (4 years) 0.2
3.1 Expo contents and COVID-19 concerns ease further (case rates
have fallen to very low levels only in the last few weeks, too short
0.0
UAE (3 years) -2.6 a timeframe for most tourists to book holidays). The relaxation of
travel requirements should boost tourism. The UK, traditionally one
Palestine (2 years) 2.6
-1.5
of the main tourism source markets for Dubai, only placed the UAE
Bahrain (2 years) -3.6
0.3 on its green list for quarantine-free travel on October 4th and so
there could be a wave of British visitors, who in last December made
Jordan (2 years) -0.6
2.0 Dubai-London the world’s busiest international route following an
earlier easing.
Egypt (2 years) 5.7
4.1
2.1
Most government employees (which also means most UAE
Libya (0 years) 0.5
August or latest month (%y/y) nationals) are being offered a week of paid leave to attend, which is
KSA (0 years) 0.3 Low in 2021-20 (%y/y) a strong incentive that will boost resident visitors. However, a large
0.3
part of the UAE’s 9.3m population are low-paid unaccompanied
Source:National sources; July: Bahrain, Iraq, Oman, UAE; June: Libya; April: migrant workers who are unlikely to attend, despite free or
Kuwait subsidised tickets. So far, no breakdown has been provided in the
Inflationary fiscal policy changes attendance numbers between UAE residents and tourists and it
may be necessary to wait until Dubai Tourism’s monthly data, which
Changes in fiscal policy have also been a factor in some countries. is usually published about 6-8 weeks after the month-end, to see
The tripling of the Saudi VAT rate to 15% in July 2020 sharply whether there has been a significant uptick in tourists in October.
boosted inflation for a year, peaking at 6.2% in June 2021, the
highest since 2009. However, it does not appear to have had a Third party forecasts in 2019 had predicted that Expo would boost
persistent impact, as inflation dropped sharply to just 0.4% in July the UAE’s GDP by 1.5%. This assumed tourist targets would be met
2021, roughly where it had been before the hike. The introduction of and so the actual impact may be closer to 0.5-1% of GDP, once
5% VAT in Oman in April also had an inflationary impact, although adjusting for actual arrivals. This will still be a welcome boost and
slightly less pronounced in relative terms as inflation only increased comes at a time when Dubai’s economy is expanding again and
by 2 percentage points that month (to 1.6% from -0.4% in March), real estate prices are rising at their fastest rate since 2014, Property
partly because Oman implemented its VAT with a larger range of Monitor’s Index was up 18% year on year in September to the
zero-rated items than Saudi Arabia did, to mitigate social hardship. highest since February 2019. A recent survey by Dubai Chamber
Other fiscal policy changes likely had an impact on inflation but found that 83% of firms surveyed expect business conditions to
are more difficult to attribute. Oman has been phasing in higher improve in Q4, partly because of Expo, the third-highest reading on
electricity and water prices this year and also reducing subsidies in record.
other areas. Saudi Arabia increased a range of tariffs in July 2020,
and then in July 2021, suddenly tightened its criteria for tariff-free
imports from the GCC, which now excludes exports from free zones
and requiring that exporting companies had a minimum of 25% GCC
national employees, a difficult requirement to meet in states where
expats staff over 90% of the private sector.
Looking ahead, Bahrain recently announced plans to double its
VAT rate to 10%, which could come as soon as January 2022 if
parliament approves the plan and will add 2pp or so to its inflation.Data and
Data andprojections:
projections:November
November2021
2021
GDP share (2021) Real GDP growth (% y/y) Fiscal bal. (% GDP)
PPP MER Q2-21 2021p 2022p Aug-21* 2021p 2022p 2021p 2022p
Middle East 100% 100% - 4.0 4.8 3.3 3.5 3.0 -6.1 -2.8
GCC 59.8% 70.4% - 2.4 4.1 0.8 2.8 2.4 -5.0 -1.8
Saudi Arabia 33.0% 35.5% 1.8 2.8 4.8 0.3 3.2 2.2 -3.1 -1.8
UAE 13.3% 17.3% - 2.2 3.0 0.0 2.0 2.2 -0.5 -0.2
Qatar 5.2% 7.1% 4.0 1.9 4.0 3.0 2.5 3.2 2.8 5.7
Kuwait 4.0% 5.6% - 0.9 4.3 3.1 3.2 3.0 -1.5 1.0
Oman 2.8% 3.4% - 2.5 2.9 2.2 3.0 2.7 -2.6 1.1
Bahrain 1.5% 1.6% 5.7 2.4 3.1 0.3 1.0 2.7 -8.0 -8.0
Non-GCC 40.2% 29.6% - 7.6 6.4 9.3 5.3 5.3 -5.0 -4.3
Egypt 26.3% 16.7% - 3.3 5.2 5.7 4.5 6.3 -7.3 -6.3
Iraq 8.2% 8.5% - 3.6 10.5 7.4 6.4 4.5 -1.5 -2.5
Jordan 2.1% 1.9% 3.2 2.0 2.7 2.0 1.6 2.0 -7.7 -5.9
Lebanon 1.5% 0.8% - -10.5 - 138.0 - - -3.0 -
Libya 1.7% 1.1% - 123.2 5.3 2.1 21.1 8.0 6.8 -12.5
Palest. Terr. 0.4% 0.6% 19.0 4.4 6.0 2.6 1.3 1.7 -7.7 -6.8
Sources: PwC analysis, National statistical authorities, IMF estimates and forecasts (WEO, October 2021). *Older inflation series: July: Bahrain, Iraq, Oman, UAE;
Sources: PwC analysis, National statistical authorities, IMF estimates and forecasts (WEO, October 2021). *Older inflation series: July: Bahrain,
June: Libya; April: Kuwait; ^The IMF has temporarily suspended forecasts for Lebanon, therefore the GDP share for Lebanon is based on 2020 WEO data and the 2021
Iraq, Oman, UAE; June: Libya; April: Kuwait; ^The IMF has temporarily suspended forecasts for Lebanon, therefore the GDP share for Lebanon is
forecasts are from the World Bank.
based on 2020 WEO data and the 2021 forecasts are from the World Bank.
The Middle East region is defined here based on PwC’s business coverage (which excludes non-Arab countries, Syria and Yemen).
The Middle East region is defined here based on PwC’s business coverage (which excludes non-Arab countries, Syria and Yemen).
Chart of the quarter IPOs, recent and pending ($bn)
A surge of major IPOs is underway, particularly in Saudi Arabia and
Abu Dhabi. This comes after a drought in both markets, with Saudi ACWA Power 10.9
Arabia not seeing any substantial IPO since Aramco in 2019 and 1.2
Abu Dhabi no IPOs at all since 2017. The current shift is a result of Adnoc Drilling 10.0
rising confidence in the region, as a result of high oil prices and the 1.1
COVID-19 recovery, together with high global equity valuations. It
Fertiglobe 6.0
is also due to government entities raising financing. Abu Dhabi’s 0.8
Mubadala kicked off the current IPO boom in July with its subsidiary
Yahsat and then ADNOC listed its drilling subsidiary and fertilizer Solutions by STC 4.8
1.0
joint-venture, Fertiglobe. Royal-backed holding company IHC is now
planning to IPO its tech unit Multiply. In Saudi Arabia, the Public Yahsat 1.8
0.7
Investment Fund is raising capital to finance its domestic giga-projects Stock sold
such as NEOM and tourism developments. It is the major shareholder Tadawul (pending) 4.0
Valuation
in both Saudi Telecom, which spun off its “Solutions by STC” unit, and 0.8
ACWA Power, as well as being the owner of Tadawul, whose long-
Multiply (pending) 2.5
postponed listing is reported to be coming soon. The three big firms 0.8
that have IPOed since September have all seen their stocks surge on
Source: Tadawul and Abu Dhabi Securities Exchange
their first trading days, helping build demand for future IPOs.
Contact details
Hani Ashkar Stephen Anderson Richard Boxshall
Middle East Senior Partner Middle East Clients & Markets Leader Middle East Senior Economist
E: hani.ashkar@pwc.com E: stephen.x.anderson@pwc.com E: boxshall.richard@pwc.com
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